EU seeks broad financial transaction tax

Plan has provisions to prevent avoidance

The European Union will propose a far-reaching tax on financial transactions which could be collected worldwide as soon as Jan. 1 next year by the 11 nations that have so far signed up to participate.

The plan by the EU in Brussels, to be outlined today, invokes “residence” and “issuance” ties to firms in participating countries, in a bid to prevent traders from escaping the levy by trading outside the tax’s zone, according to documents obtained by Bloomberg News. The plan says that to escape the proposed tax entirely, firms in other nations would have to entirely cease financial-services business with the 11 EU nations involved.

The proposal marks a new stage in the EU’s efforts to raise revenue from the financial sector and curb what it sees as a “patchwork” of local levies. Like a prior, failed proposal for all 27 EU nations, today’s plan would set a rate of 0.1% for stock and bond trades and 0.01% on derivatives trades.

The EU estimates the arrangement could raise 30 billion euros ($40 billion) to 35 billion euros per year. It would need approval by the 11 participants to proceed. All EU nations can sit in on the talks and have the option to join.

ESM Excluded

The proposals would exclude certain types of trading from the scope of the tax: day-to-day transactions by individuals and non-financial firms; primary offerings of stocks and bonds; and trades with central banks, the European Stability Mechanism and other official institutions. According to EU documents, it also would exclude trades in units of collective investment funds along with certain restructuring operations.

Repurchase agreements would be included, though they would be taxed differently from trades with an outright buyer and seller, according to the documents.

The plan also would include pension funds. The EU intends to argue that a well-designed tax could make pension funds safer by encouraging them to make untaxed purchases on the primary market and hold securities to maturity, the documents show.

When EU ministers last month allowed the 11 willing nations to proceed with transaction-tax negotiations, the spillover effects on pension funds were a concern.

The Netherlands will wait before deciding whether to sign up, said Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area finance ministers. “One of the criteria for us is our pension funds,” he said. “It’s very important that these pension funds are not harmed by a new tax.”

U.K. Abstention

A weighted majority of EU finance ministers backed the measure in a Brussels meeting last month. The U.K., home to the Europe’s largest financial center, abstained along with Malta, the Czech Republic and Luxembourg. The Confederation of British Industry said yesterday that the tax plan’s extended scope will require extensive review.

“The Commission’s FTT proposals are now significantly different from its initial plans, so the impact on growth and jobs must be assessed before proceeding,” Matthew Fell, CBI director for competitive markets, said in a statement.

While the U.S. will study the proposal, it doesn’t support the European financial transactions tax, according to a U.S. Treasury Department spokeswoman who asked to not be named. The tax would harm U.S. investors who bought affected securities, a concern that Treasury officials have raised with their European counterparts, the spokeswoman said.